China may have taken the crown this month for the worldâs largest flotation, with the $19bn (â¬15bn) Hong Kong and Shanghai stock exchangesâ listing of Industrial and Commercial Bank of China. But doubts about the health of the financial sector refuse to go away.

The float of China’s largest bank prompted more than $500bn in investor demand, a figure greater than China’s gross domestic product 12 years ago. Its success was never in doubt.
In June, the $9.7bn Hong Kong listing of Bank of China, another one of China’s big four commercial banks, received nearly $200bn of orders, while a Shanghai offering of its shares a month later was 33 times covered.
Demand for Chinese banks, particularly the largest, remains high. Foreign financial groups, including Bank of America, Goldman Sachs and Merrill Lynch, invested $16bn buying minority stakes in Chinese companies last year. However, bankers are wondering whether investing in Chinese banks, despite spectacular returns – Allianz, American Express and Goldman Sachs made a paper profit of about $9bn when ICBC floated – is worth
the risk.
In May, accountancy firm Ernst & Young estimated non-performing loans at the big four – Agricultural Bank of China, Bank of China, China Construction Bank and ICBC – were up to $358bn, more than two and a half times the official $133bn.
Ernst & Young retracted the report after complaints from the Chinese government. However, its figures are supported by other analysts. Rating agency Standard & Poor’s estimated non-paying loans make up between 20% and 25% of Chinese credit, up to $650bn. Merrill Lynch analysts, in a report on the Chinese banking market published two months ago, wrote that the big four commercial banks account for 82% of reported non-paying loans.
Gordon Chang, a Chinese market observer appearing before the US-China Economic and Security Review Commission in August, said: “We have little idea how much bad debt is stuffed into various institutions around China. Yet we know analysts have almost always guessed on the low side and, even though there have been sporadic partial recapitalisations, estimates have consistently gone up.”
Chang also said the Chinese government would be unlikely to move fast enough to avert a crisis and that state reserves are unlikely to cover all the non-paying loans.
He said the use of reserves to bail out banks partially owned by foreigners would be “politically unacceptable”.
The government has spent $33bn supporting the four largest banks since 1998 and, if loan carveouts are included, that rises to about $200bn.
One problem for Chinese banks is their diversification from lending.
Analysts at Fitch Ratings, a rating agency, said in June the high level of deposits entering the Chinese banking system – estimated at between $400bn and $575bn a year since 2003 – had enabled an “insolvent banking system” to “stay on its feet”.
A report by Goldman Sachs last month said China’s banks make only 5% to 9% of their revenues from fee-paying services, the lowest proportion of any Asian country.
Analysts at Moody’s, another rating agency, also said China’s banks are, on average, the least profitable of any in Asia, which they attribute to low fee income, lack of diversification, inefficiency and high provisions and taxes.
Despite these problems, investors have poured money into the banks at record levels.
This has been driven by China’s negative savings rate, which means Chinese investors who put cash in a bank account are guaranteed to lose money. However, if they invest their money in a bank’s shares, they are likely to make money given the recent performance of banking stocks.
Last month, shares in China Merchants Bank soared 30% on their Hong Kong debut after the deal closed 53 times covered.
A Hong Kong market source said last month the country’s market resembled a casino more than a structured trading system.
Two weeks ago, Agricultural Bank of China, the last of the country’s big four to remain unlisted, said it was preparing to become a joint stock company, the first stage before a float.
According to reports in the state media, the government decided against splitting it into smaller regional operations and is following the template set by the other three banks with plans to float the bank, most likely through a joint Hong Kong and Shanghai listing.
Rating agency analysts, despite their concerns, are supportive of the government’s policy of getting foreign strategic investors to put money into the banks, and said flotations have strengthened the financial and operational position of those banks that have completed them.
Moody’s analysts wrote in their report: “The banks, particularly the large entities, must shift from operating as bureaucratic organisations into commercially orientated and innovative entities, which are competitive and skilful in risk pricing. This is the most difficult stage of reform.”